Research shows that investors are putting more money than ever into crowdfunded businesses. But does the sector really offer attractive returns, asks Ben Lobel

If a business needs finance to expand, improve facilities or purchase new equipment, it can either seek to borrow money or ask for capital investment in return for equity, i.e. shares.

But while sources of equity finance used to be restricted to the likes of angel investors and venture capital trusts, today equity crowdfunding operators such as Crowdcube, Seedrs and Angels Den have emerged to enable businesses to raise money online from large numbers of individuals, each making relatively small investments in the hope of scoring a healthy return in the event of an IPO, merger or exit.

As an investor, the process is usually straightforward. Often it’s as simple as signing up to a website, browsing the video and written pitches available, and then choosing what to invest in and how much. Once the legal documentation is completed, you will become a shareholder in that business, be sent a share certificate and appear on the business’s share register at Companies House.

It’s a formula that is proving popular. Today, there are 235 live crowdfunding platforms in the UK, according to data from finance analyst TAB, and investors’ appetite for crowdfunding businesses has grown considerably since 2015, statistics from Businessagent.com reveal. So far in 2017, the average monthly cash injection from all investors across all equity crowdfunding platforms is £13.5 million, compared with £7.4 million in 2015, with a monthly high of 11,202 investors contributing to 93 projects in May this year.

Jon Medved, CEO of crowdfunding platform OurCrowd, says the advent of such organisations has disrupted the way that start-up companies are funded, democratising both sides of the marketplace, meaning investors and entrepreneurs. ‘By opening up opportunities to investors from around the world, the phenomenon is breaking down the geographical barriers that plague many start-ups, particularly those in areas where VC funding is not plentiful,’ Medved says.

For businesses, crowdfunding can represent a welcome source of free publicity in addition to funds. But to what extent does it present an opportunity for investors in 2017?

Equity investing in early stage start-up businesses is becoming an increasingly common component of a diversified portfolio. Part of the attraction of funding start-ups continues to be a highly attractive tax regime that encourages investment into seed enterprises – with generous tax reliefs that mitigate much of the risk of investing in a high-risk asset class.

In their 2017 manifesto, the Tories described two incentives for investors as ‘world leading’: “We will help innovators and start-ups, by encouraging early stage investment and considering further incentives under our world-leading Enterprise Investment Scheme and Seed Enterprise Investment Scheme.” Page 77, Conservative Party 2017 Manifesto.

The Enterprise Investment Scheme (EIS) was set up in 1994 and continued to be supported through Labour governments. It has since been made more attractive by the Conservative government, and has established itself as a part of tax legislation that neither of the main parties would be likely to compromise. The Seed Enterprise Investment Scheme (SEIS), established in 2012, is an extension of EIS and offers even more generous reliefs.

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Private-equity investments can be enticing, but also complicated. It can be expensive for institutional investors, endowments, and pension funds to find and monitor private-equity investments—which can then be illiquid and difficult to scale.

A private-equity fund of funds, which holds a portfolio of other funds, potentially provides diversification and economies of scale, as well as specialized investment services. But are the advantages worth an extra layer of fees? Private-equity FOFs typically charge investors an annual fee of around 1 percent, and management gets 5 percent of all gains. That’s on top of the standard “2-and-20”—2 percent of total asset value and 20 percent of any additional profits—usually charged by each of the private-equity firms in which FOFs invest. Research by University of Virginia’s Robert S. Harris, University of Oxford’s Tim Jenkinson, Chicago Booth’s Steve Kaplan, and Rüdiger Stucke of private-equity firm Warburg Pincus suggests that one type of private-equity FOF has been able to overcome that fee hurdle.

Neil Martin talks to Daniel Rodwell, Managing Director at GrowthInvest, about the changes to pension allowances and how EIS & VCTs can take on an important role.

The predicted capacity crunch on VCT and EIS offers that took place in the last financial year, will mean that advisers and investors will have to start planning their tax-efficient investments even earlier this year, according to Daniel Rodwell, Managing Director of GrowthInvest. It has traditionally been in the early autumn when VCT and EIS managers tend to launch their latest offers, but Rodwell believes that a fear of lack of capacity, combined with a growing realisation that tax-efficient investments can be a very effective part of pension planning for some clients.

A realistic alternative

Daniel says that pension changes are fuelling interest in alternative investments and driving a lot of new enquiries to the platform from advisers, and direct investors: “More advisers are beginning to understand how these investments can be used within pension planning for appropriate and suitable segments of their client base. EIS and SEIS are a realistic alternative for those people that are hitting the upper limits of the lifetime value; those people that are impacted by the new rules”

Technology executive Veronica Wu looks at machine learning and the process of Silicon Valley venture capital investing, a traditionally a “long shot” method, with an eye to improving win percentage. In a McKinsey question and answer session as part of their June quarterly report, Wu reveals how they use technology to build better predictive models for venture capital investing that integrate with humans. Like much of the gloss coming out of Silicon Valley regarding “machine learning,” however, the questions were light in key areas. This includes pointing to exactly where a machine scans information it wasn’t programmed to scan, “learn” knowledge or gain insight based on entirely new patterns not related to an if-then formula, and then develop an investment method that didn’t follow any patterns from past strategies? Wu’s use of computers to create models that assist in decision making are tangible nonetheless, even if it is an accomplished human more responsible for the success of the machine.

While returns are potentially high, risks are high too, and you must have holding power

Investing in a venture capital (VC) fund is not for the average retail investor because while returns can be high at about 20 per cent or more a year, the risks are high too.

The minimum investment amount is usually $1 million for individuals and the gestation period about eight to 10 years. The illiquidity of VC investments means that investors must have holding power and there is no guarantee that the fund will succeed.

But if you have spare cash and wish to increase your wealth while helping other firms to grow, the VC fund is a viable asset class to consider.

This article was written by Matthew Cushen, co-founder of Worth Capital.

Ten year anniversary

As we approach the ten-year anniversary of the financial crisis there seems an interesting contrast between then and now.

10 years ago we had a financial meltdown that had a seismic impact on day-to-day economics and the life of the man in the street (at least a Western developed market street). It was the bankers and the investment community that bought the pain that was then shared across the society, and the age of austerity was born.

Whatever the causes – continuing austerity measures, further globalisation, migration and/or increasing automation – in the developed world we now find ourselves in a period of remarkable political and social turmoil. Only Germany seems to be the exception that proves the rule.

But unlike 10 years ago, the impact of this turmoil on the big investment markets barely registers. Why is market sentiment so benign? Fair enough for the FTSE 100, the impact of our pound continuing to tumble benefits the high participation of foreign earnings. But the S&P, FTSE 250, 350, AIM have all looked for the most part impervious. Even stocks like Merlin Leisure – that you’d expect to be hit by the recent terrorist activities – have stayed buoyant.

Considering corporate investment for your company? If so, you’re not alone. Last year, the combined value of corporate venture capital financing hit $64.9 billion. That’s a ten-year high and a sign that companies are doubling down on startup investments in pursuit of innovation.

Still, knowing whether a corporate investment is right for you and your company takes some careful consideration.

Understanding corporate venture capital

While corporate VC is a subset of venture capital, they are not the same. Corporate VC investments typically leverage the company’s balance sheet to make direct equity investments, rather than investing through a fund. Additionally, the corporation usually offers a range of other strategic opportunities for the startup beyond cash, including accelerator-like mentorship and guidance, access to certain tech or business development resources , and even the potential to become one of the startup’s all-important initial or marquee customers.

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The liquid alternative strategy’s two objectives consist of delivering a return target of cash +5 per cent over the long-term, and reducing half of the volatility in global equities over a rolling three-year period.

INVESCO head of sales, Eben Bowditch, said to achieve the objectives, the fund had a two to three year investment outlook on 25 to 30 ideas that had different investment goals.

“We call them ideas but essentially they’re trades or positions and each one of those positions are designed to operate a positive return,” he said.

“The fund’s philosophy is to find ideas in any asset class. It’s an unconstrained research approach that’s managed in a robust risk framework.

“So the fund is a genuine multi-asset that can invest in volatility, inflation instruments, equities, currencies, fixed interest, credits, and real estate proxies. It invests in just about every asset class that’s possible in a liquid format.”